• A director of a corporation is bound by the equitable principles of the duties of care and loyalty.businessman write marker on white desk on white background image by Anatoly Tiplyashin from Fotolia.com
  
  A board of directors is a body of elected or appointed people who exercise the primary managerial authority over the business and affairs of a corporation. The board acts on behalf of the corporation and is obligated to discharge its obligations in a manner that promotes the interests of the shareholders. Accordingly, because directors are in a position of trust with the shareholders, the law of equity imposes strict fiduciary duties by which they must abide or risk liability to the corporation.
  
  

The Duty of Care

• The fiduciary duty of care requires directors to perform in good faith and in a manner the director reasonably believes is in the best interests of the corporation and with the care and diligence that an ordinary prudent person would use in similar circumstances. Types of breaches of the duty of care include a director's "nonfeasance," such as failing to attend any board meetings, and "misfeasance," such as making a reckless business decision. However, even if a director acts or fails to act in a manner that constitutes a breach, he can only be held liable if the act or omission actually and directly caused the corporation to suffer harm or loss.
  
  

Business Judgment Rule and Duty of Care

• As long as a director acts on an informed basis, in good faith, and genuinely believes the action will benefit the corporation, his business judgments will not violate the duty of care.businessman find idea image by Anatoly Tiplyashin from Fotolia.com
  
  The business judgment rule is an equitable rule of reason created by the courts to insulate directors from judicial scrutiny of their business decisions absent a showing of abuse of discretion. This rule is essentially a presumption that in making business judgments, directors acted on an informed basis, in good faith, and with the honest belief that the action was in the corporation's best interest.
  
  The heavy burden of overcoming this presumption is on the party challenging a director's conduct as violative of the duty of care. The challenger can overcome the presumption only by proving that the director acted fraudulently, illegally, with gross negligence or recklessness, or with a personal interest in the transaction at issue. Generally, only in extreme situations will a court hold that a director's conduct is so egregious or imprudent as to fall outside the scope of the business judgment rule. Accordingly, this rule is often prohibitive in terms of a corporation's ability to ultimately establish a director's liability for an alleged breach of the duty of care.
  
  

Duty of Loyalty

• The fiduciary duty of loyalty requires directors to act in an independent manner and with regard only to the interests of the corporation and concerns of the shareholders. It prohibits a director from benefiting financially at the expense of the shareholders in self-dealing transactions with the corporation.
  
  Alleged breaches of the duty of loyalty usually arise in situations involving self-interested director transactions and implicating personal conflict of interests. A director has a conflict of interest in any transaction with the corporation by which he stands to gain a personal profit and/or in which he has a personal interest. A director has a personal interest if he is affiliated with the other party to the transaction or if the transaction is one that should be considered by the corporation's board. The business judgment rule does not apply to a director's actions related to self-interested transacting because the conflict of interest rebuts the presumption of good faith.
  
  

Permissible Interested Director Transactions and Duty of Loyalty

• A director will violate the duty of loyalty if he engages in inequitable self-dealing transactions with the corporation and profits at the shareholders' expense.hand and pda on table at meeting image by Dmitry Goygel-Sokol from Fotolia.com
  
  Courts recognize that it would be inequitable to prohibit a director from engaging in any personally profitable dealings relating to a corporation simply because he sits on the corporation's board. Thus, a director will not be held in violation of the duty of loyalty simply because he participated in and profitted from a self-interested transaction. Rather, courts apply an equitable standard in determining whether the director's conduct in connection to the particular transaction constitutes a breach rendering him liable to the corporation for any personal profits he gained and/or losses the corporation incurred as a result.
  
  Specifically, a self-dealing director will be held in compliance with the duty of the loyalty if: (1) he disclosed his personal interest to the board and a majority of directors approved the transaction; and/or (2) the deal was objectively fair and reasonable for the corporation, even though the director failed to disclose. If either requirement is met, the court will hold that the director acted equitably and that the transaction is binding on the corporation.